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Wednesday, October 27, 2021

Rupee: Depreciation

Arrest the fall...soon


A falling rupee pushes hopes of economic recovery further beyond
AMIR HOSSAIN | Issue Dated: June 23, 2013, New Delhi
Tags : Indian Rupee | Rupee depreciation | Indian economy | US Dollar |

Several pundits have projected that the Indian economy will be back on track in 2013. However, almost half of the year has gone by but there are hardly any indications of recovery. What makes such chances even more remote is the plunging Indian currency, which fell to a historic low of 57.54 against the US Dollar (USD) on June 10, 2013. The next day the rupee depreciation worsened to a new low of 58.35 vs. the USD. Several financial analysts have started believing that the rupee will drift further south towards 59-60 vs. the USD in the days to come. Can India hope to recover from the ongoing economic downturn with a currency that is fast losing all semblance of holding its own?

Economic Affairs Secretary Arvind Mayaram has tried to nullify the impact of a depreciating rupee saying, “panic (in) the market is unwarranted”. Chief Economic Advisor Raghuram Rajan, in a conference, confidently stated that “the weakness in rupee could be a temporary phenomenon.” But the current scenario indicates otherwise. As the depreciation of rupee makes imports costlier, there is no doubt that the weakening currency (which has devalued by over 7 per cent against USD during the current fiscal) will make it tougher for our government and the RBI to contain the current account deficit and check inflation.

On the other hand, exporters are celebrating as they get to earn more local currency for every unit of foreign currency worth of goods and services sold. The Indian IT sector is expected to reap a windfall as its revenue depends overwhelmingly from overseas markets. However, it would be naive to expect our exports to offset the adverse impact of costlier imports. The country's import bill is set for an exponential jump in light of the bulge in the cost of crude imports. Crude oil import accounts for 70 per cent of our fuel requirements and the ongoing currency depreciation will invariably aggravate the CAD situation besides also stoking domestic inflation as rising fuel prices will have a cascading effect.

Voicing her concern over the sliding rupee, Radhika Rao, an economist with DBS Bank says: "A weak rupee can upset the easing inflation trajectory, raise CAD financing concerns and up the currency risks for offshore borrowers. This might also raise another hurdle for the central bank to cut rates." In order to allay such apprehensions, India will need to quickly take steps to restore stability to its currency. Not doing so will be at the peril of losing investor’s confidence and sinking further down on economic parameters.


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Issue Dated: Feb 5, 2017